Essays on Investment Behavior in Pakistan

Abstract

The thesis consists of four independent essays on investment behavior in Pakistan. These include (i) Investment Trends and Policies in Pakistan; (ii) Political and Economic Uncertainty and Investment Behavior in Pakistan (iii) Private, Public and Foreign Investment Nexus in Pakistan: An Empirical Analysis of Crowding-in/out Effects; and (iv) Investment Behavior in Pakistan: A Sector-Wise Analysis of Private and Public Investment. The first essay surveys investment trends and policy framework for the economy of Pakistan. The economic situation in Pakistan has endured many fluctuations since independence in 1947. The situation is not different for the case of investment patterns throughout the history of the country. In addition to that, the country has been confronted with multiple policy changes such as nationalization, denationalization, privatization etc. coupled with political instability. The study analyzes the (i) trends of public, private domestic and foreign direct investments along with trends of total investment and economic (GDP) growth; distribution of aggregate investment; and (ii) sector-wise composition of private and government investments for the time span 1959-60 to 2014-2015. The analysis reveals that over the period private domestic investment has dominant share in total investment compared to public investment and foreign direct investment. Sector-wise private investment composition shows the dominant share of services over time. On the other hand, in case of sector wise composition for the public investment the general government investment has witnessed the rising trends over the years and emerged as a leading sector followed by industry and services respectively. The second essay examines the impact of macroeconomic uncertainty and political (in) stability, controlling for other determinants of investment, on aggregate/total gross fixed investment in Pakistan. Autoregressive Distributed Lags (ARDL) technique is used to analyse the investment behavior under uncertainty. The study finds that political stability affects the aggregate investment significantly and positively in the long-run. The impact of macroeconomic uncertainty on investment is found to be negative and significant. Other findings are consistent with literature. Analysis in the third essay aims to empirically explore the public, private domestic and foreign direct investments nexus to figure out the direction and relative strength of the relationship. Using the Vector Error Correction Model (VECM) the interrelationship among the private domestic investment, public investment, foreign direct investment (FDI) and Gross Domestic Product (GDP) is analysed. The results show that all the three types of investments (private domestic, public and foreign direct) are substituting (i.e. crowding-out) each other while these investments are robust determinants of economic growth. The fourth essay investigates the determinants of private sector investment in major economic activities/categories viz. agriculture, industry and services and public investment including general government investment for the Pakistan economy. The models of private gross fixed investment in each sector and public investment are developed in the light of relevant theoretical and empirical literature. Autoregressive Distributed Lags (ARDL) modeling technique is applied for each case to analyze investment behavior in Pakistan. The overall findings of the study are in line with theoretical models as well as dynamics of the economy. The results reveal that the accelerator model performs well for both private and public investments while the user cost of capital is not significantly explaining private investment behavior. The behavior across the sectors not only differs in terms of overall but also sector-specific determinants. The findings also suggest the structural change process in investment patterns for the Pakistan economy.